www.hudclips.org
U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000
OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING-FEDERAL HOUSING COMMISSIONER
May 3, 1989
Mortgagee Letter 89-14
TO: ALL APPROVED MORTGAGEES
ATTENTION: Servicing Managers (Single Family)
SUBJECT: Implementation of Deficiency Judgment Activities
The Department of Housing and Urban Development (HUD) published
its Final Rule on deficiency judgments in the Federal Register on
February 16, 1988 (at 53 FR 4384). The Rule, which appears in the
Code of Federal Regulations at 24 CFR 203.369, went into effect on
March 28, 1988. It makes it possible for HUD to require that lenders
pursue deficiency judgments, but only in cases where foreclosures
involve mortgages insured pursuant to firm commitments (or direct
endorsement credit worksheets) issued on or after March 28, 1988.
For those mortgages insured pursuant to firm commitments (or direct
endorsement credit worksheets) issued prior to March 28, 1988, the
Department can continue to request that mortgagees diligently pursue
deficiency judgments against selected mortgagors. Until recently,
HUD was not authorized to reimburse lenders for the full expense of
obtaining deficiency judgments. That situation has been rectified by
new regulation 24 CFR 203.402(o), which makes the added costs (which
must be reasonable and customary) of pursuing the judgments 100
percent reimbursable. HUD strongly encourages mortgagees to
cooperate with requests from Field Offices regarding deficiency
judgments.
The Department has already begun requesting or requiring
mortgagees to obtain deficiency judgments in instances where the
mortgagors are non-occupant owners; have previously defaulted on one
or more FHA-insured mortgages resulting in the payment of claim(s);
or are "walkaways," having abandoned their mortgage payment
obligations despite their apparent continued ability to pay. This
will continue to occur where the pursuit of deficiency judgments is
consistent with State law.
HUD will be using data collected by the Department that
identifies mortgagors with two or more FHA-insured mortgages, as
well as information from the single family default monitoring
system. When these reports are combined, they yield listings of FHA
mortgagors who are by definition non-occupant owners and are also in
a default or pending-foreclosure status (or have already experienced
foreclosure) on one or more FHA-insured mortgage loans. In addition,
mortgagee monitoring staff outstationed from HUD Headquarters, and
loan management staff in many Field Offices around the country, will
pass along information about prospective subjects for deficiency
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judgments to the staffer responsible for determining which mortgagors
to pursue. He or she in turn will contact the mortgagees (first by
telephone, then by follow-up letter) to advise them that HUD is
requesting or requiring them to seek deficiency judgments against those
mortgagors who have been selected for such treatment.
Mortgagees, if requested or required by HUD Field Offices to
pursue deficiency judgments against particular mortgagors, will be
instructed to assign all the judgments they obtain to HUD. (Model
forms facilitating this action will soon be made available by Field
Offices to mortgagees, along with additional instructions.)
Mortgagees are specifically directed not to engage in collection of
deficiency judgments obtained in connection with any FHA-insured
mortgage, effective immediately. The Department will utilize various
methods to collect once the judgments are assigned, including
conventional means of pursuing the judgment debtors by HUD personnel,
use of private collection agencies and/or judicial proceedings
initiated by the U.S. Department of Justice, salary or administrative
offset (for active or retired Federal and military personnel), and
Internal Revenue Service (IRS) offset of tax refunds. Some of these
measures may result in additional fees that are chargeable to the
debtor.
If the judgment debt is declared uncollectible, in whole or in
part, by the Federal Government, the amount of the uncollectible
debt will be reported by HUD to the IRS on Form 1099-G. Mortgagors
who successfully negotiate compromise settlements will also be the
subject of an IRS information return on Form 1099-G for any
indebtedness "forgiven" by the Government under the terms of the
settlement. Before the Form 1099-G can be filed, however, the debt
amount must be compromised or declared uncollectible by Federal
administrative procedure, or else the applicable Statute of
Limitations on enforcement of the deficiency judgment must have run.
The Department now anticipates that it will have the necessary
procedures in place for Form 1099-G reporting by the second half of
1989.
The procedure of pursuing a specific mortgagor for a deficiency
judgment can begin in two different ways. As discussed above, HUD
may request or require the mortgagee to take this action based on
data gathered "in-house." Alternatively, the mortgagee can initiate
the process by bringing information to the attention of the local HUD
Office indicating that a mortgagor meets the criteria for pursuit of
a deficiency judgment. The Department encourages lenders to
communicate the details of serious abuses of which they are aware to
the Loan Management Branch Chief at the appropriate HUD Office.
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Please note that only where pursuit of the deficiency judgment was
requested or required by the Department, or where HUD has approved a
mortgagee's request for permission to pursue a judgment, will the
expenses connected with this action be reimbursable when the claim is
filed.
Another noteworthy aspect of HUD's deficiency judgment
initiative is the Department's use of the Claims Without Conveyance
of Title (CWCOT) procedure to establish the Commissioner's Adjusted
Fair Market Value (CAFMV), which is the amount the mortgagee will bid
at the foreclosure sale. It is the CAFMV, or, if a third party bids
higher, the consummated third-party purchase price, that is used to
establish the deficiency judgment amount when it is subtracted from
the mortgagor's outstanding indebtedness at the time of foreclosure.
(Refer to Mortgagee Letter 87-20 , dated June 23, 1987, for a full
explanation of CWCOT.)
The Department will be widely publicizing its efforts to counter
abuse of the FHA Single Family insurance programs through the
prosecution of deficiency judgments and by the reporting of
uncollectible and/or compromised amounts to the IRS. It is hoped
that these initiatives, directed toward investors, repeat defaulters
and "walkaways" will act as deterrents against abuse.
HUD will be issuing a separate Mortgagee Letter in the near
future, which provides instructions on how to include deficiency
judgment-related expenses in claims for insurance benefits.
The cooperation of participating mortgagees is crucial to our
success, and the Department appreciates your commitment to help us
accomplish this objective. Please feel free to call the Single
Family Servicing Division at Headquarters if you have any questions
on this matter, at (202) 755-7330.
Sincerely yours,
James E. Schoenberger
General Deputy Assistant Secretary
for Housing
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A P P E N D I X
ANSWERS TO COMMONLY ASKED QUESTIONS
REGARDING DEFICIENCY JUDGMENTS
1. What is the purpose of the pilot program?
During the pilot program's approximately six-month run, policies
and procedures will be formulated and evaluated, and thereafter,
applied Department-wide. This means that elements of HUD's
deficiency judgment initiative are subject to change over the coming
six months, making mortgagee cooperation and attentiveness crucial to
the success of the Department's efforts.
2. To what extent will HUD be requesting or requiring the pursuit of
deficiency judgments?
The program is envisioned primarily as a deterrent to mortgagor
abuse of the HUD Single Family insurance programs. The number of
deficiency judgments sought will vary by State and by Field Office,
and will be roughly comparable to the level of mortgagor abuse within
a given Office's jurisdiction.
3. How should a mortgagee facing severe obstacles to complying with
a HUD request or directive to seek a deficiency judgment respond?
The Department desires the highest level of mortgagee
cooperation that is feasible. Occasionally, legal obstacles may
arise with which the Field Office is unfamiliar. There may be other
factors that seriously complicate or compromise the procedure of
obtaining a deficiency judgment, of which the HUD Office may be
unaware. In such situations, the mortgagee must contact the Loan
Management Branch Chief at the HUD Office with jurisdiction over the
deficiency judgment at issue and explain the special circumstances as
soon as they become known. Based on the information provided, the
Field Office will respond with further instructions to the mortgagee.
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4. Will the mortgagees and their attorneys be the only parties to
pursue deficiency judgments against mortgagors with FHA-insured
mortgage loans?
In most cases, the mortgagees and their attorneys will be
exclusively involved in the pursuit of deficiency judgments.
However, we anticipate that, in States where legal requirements do
not make it impracticable, some Field Offices will obtain permission
for in-house or contract attorneys to perform the steps leading to
deficiency judgments. Mortgagees are advised, however, that such
instances will be rare and to operate on the presumption that
mortgagees' foreclosure attorneys will be seeking the deficiency
judgments that HUD requests or requires.
5. What kind of information pertaining to FHA-insured mortgagors
are mortgagees expected to share with HUD Field Offices, in the
context of the deficiency judgment initiative?
The Department welcomes information reflective of mortgagors
meeting (or not meeting) the Department's criteria for pursuing
deficiency judgments. Examples include indicating a mortgagor's
status as a non-occupant owner (investor), or one that has defaulted
previously on FHA-insured mortgage(s), or confirming that a candidate
for deficiency judgment is currently in default, or that he or she is
a "walkaway" (a mortgagor who abandons his property despite his
apparent continued ability to meet his mortgage obligations, that is,
for reasons other than financial hardship). This information may be
volunteered by the mortgagees/servicers, or else provided to the
Department when specifically requested by HUD personnel. Information
regarding the mortgagor of which HUD may be unaware and which
potentially demonstrates the inapplicability of the criteria to a
given mortgagor should be forwarded to the Loan Management Branch
Chief after the mortgagee has made a reasonable effort to verify
said information (e.g., that mortgagors were in fact owner-
occupants, or vacated and hence did not abandon their property
after foreclosure occurred due to financial hardship).
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